When countries go bust

September 6, 2010 8:38 PM

Sovereign debt issued by governments is immense. In 2009, worldwide sovereign debt exceeded $34 trillion and is now the largest risk to the global financial system. Many of the potential problems and risks are surprising, even to those well-versed in their particular area of finance. What happens if Things Go Really Bad? ...out of the multitude of potential scenarios, I have settled upon one which is really bad, but doesn’t involve asteroids, mass extinctions, or apes taking over. It is consistent with prior bad episodes of sovereign debt default. Here is the Really Bad scenario. It’s not a worst possible scenario. It is more like the Long Depression or the Great Depression reoccurring under 2010 conditions. In the Really Bad scenario, 45% of the countries with large outstanding sovereign debts are in default within a 2-3 year period." A five-part article series on the imminent dangers of sovereign default from a guest columnist at Calculated Risk blog. Some of this strays into finance ubernerd territory but Part 5C in particular is the likely the playbook for the next financial crisis.

Sovereign defaults are the tsunamis of the financial world. Here's a chart of the countries most likely to default in the next five years. And another one of the biggest debtors measured against GDP.

Part 1: How Large is the Outstanding Value of Sovereign Bonds?
Part 2. How Often Have Sovereign Countries Defaulted in the Past?
Part 2B: More on Historic Sovereign Default Research
Part 3. What are the Market Estimates of the Probabilities of Default?
Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?
Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default
Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange
Part 5C. Some Policy Options, Good and Bad
Part 5D: European Banks, What if Things Go Really Badly?

posted by storybored (61 comments total)

. . . or apes taking over.

Too late.
posted by smcameron at 8:44 PM on September 6, 2010

Too late.
Damn you.
posted by Threeway Handshake at 8:47 PM on September 6, 2010

Damn you all to hell!
posted by pompomtom at 8:52 PM on September 6, 2010 [2 favorites]

It's really quite simple. Sooner or later, humankind is will either have to come to terms with the fact that economics and finance is all a people-made illusion or that a vast global depression will happen (due to the national economies becoming one vast global economy in which everyone is subject to the same economic shocks and rhythms). Quite frankly, I wouldn't be surprised if the latter episode precedes the former.
posted by GnomeChompsky at 8:58 PM on September 6, 2010 [1 favorite]

In 2009, worldwide sovereign debt exceeded $34 trillion and is now the largest risk to the global financial system

Really?

Define "dollar."

Until you can truly define that, the "risk" is worth exactly that much.

Cows will be milked. Cars will be driven. The sun will rise and set.

What is this "dollar" you speak of? And why should I care?
posted by eriko at 9:03 PM on September 6, 2010 [2 favorites]

According to the chart Canada has a 0% chance of defaulting. So should I be stocking up on Canadian treasuries?
posted by bionic.junkie at 9:13 PM on September 6, 2010

If the US defaults, we'll just sell off Alaska. We'll even throw in a set of Palin family members in for free if you act now.
posted by Blazecock Pileon at 9:15 PM on September 6, 2010 [2 favorites]

Define "dollar."

One-fifth of a sockpuppet.
posted by joe lisboa at 9:30 PM on September 6, 2010 [13 favorites]

Define "dollar."

Same as in town?
posted by dhartung at 9:46 PM on September 6, 2010 [2 favorites]

According to the chart Canada has a 0% chance of defaulting. So should I be stocking up on Canadian treasuries?

Treasuries aren't usually a great investment unless interest rates are high, but rather a hedge or place to store money so it won't lose value. Maybe Canadian banks or financial companies instead, or Canadian oil companies. Canadian Royalty Trusts were great for a while, but the tax laws have changed, so not so great anymore if you're across the border.

But the US has very little chance of defaulting, very close to none, and most foreign banks and investors still look to the US dollar for security. We just went through a great rally of US Treasuries, which is only now beginning to turn (which is usually negatively correlated with US equity markets). If you're looking for interest it's not a good investment, as interest rates are very low right now, but lots of people traded the rally. I did on the equity side, as I'm not into trading FX with all the leverage involved.

The chart seems to indicate maybe two countries will default, as many as five, but more than that is pretty unlikely.
posted by krinklyfig at 9:51 PM on September 6, 2010 [1 favorite]

Standard's and Poor's Credit Ratings:

Australia AAA
Canada AAA
Germany AAA
Singapore AAA
United States AAA

United Kinggdom AAA, outlook negative

New Zealand AA+

Ireland AA, outlook negative
Japan AA, outlook negative
Spain AA, outlook negative

China A+

Russia BB+
Greece BB+, outlook negativ
posted by smoke at 9:57 PM on September 6, 2010

paging Mutant.
posted by Ironmouth at 10:51 PM on September 6, 2010

You guys are all hip and tech-savvy and liberal and stuff, but the inconvenient truth is that you wouldn't know shit about economics if Adam Smith rose from the grave, broke into your house while you were sleeping, squatted on your face and shat The Wealth of Nations into your earhole.

Basically, Sovereign Debt is a GOOD THING. All it means is that the country in question owes a debt which can only be paid to another country through the provision of a Sovereign.

Take the UK, for example: as everyone knows, the Queen is actually GERMAN. So Britain has to pay back a Sovereign to that country. They've chosen Sam Allardyce, currently Manager of Blackburn Rovers. And when Big Sam takes on the job of King of Bavaria, he'll improve Germany in the air and make it play a tough, disciplined foreign policy using a lone striker. Maybe he'll get some transfer money by selling Angela Murkel to Spain - I don't know.

The point is, if we still had a King-centred feudal economy we wouldn't be in this mess, would we? So the REAL blame lies with the American war of independence.
posted by the quidnunc kid at 11:23 PM on September 6, 2010 [40 favorites]

Cows will be milked. Cars will be driven. The sun will rise and set.

Um, I think the central problem is that activities like you describe — the so-called 'real economy' — have become quite inextricably linked to the 'financial economy.'

Although I'm not qualified or knowledgeable enough to make any predictions of what a US default would really feel like to people inside the US, it seems plausible that it could be coupled with a sudden increase in the price of imported goods like petroleum. So you might not be driving that car very far, and that milk might have a hard time getting to its destination, and a whole lot of other things besides.

Previous depressions have shown, quite clearly I think, that even without actually destroying anything — the factories are still standing, the workers are still there — you can still have some pretty severe effects people's day to day lives. The fact that you still have the ability to produce something or offer some service doesn't do you a lot of good if nobody is willing to buy from you.

As for the sun rising and setting, that seems like cold comfort; if we decided to annihilate ourselves in a nuclear war tomorrow, the sun would still rise and set indifferently on the charred remains the day after. Doesn't seem like a good reason to be blasé about it.
posted by Kadin2048 at 11:24 PM on September 6, 2010 [4 favorites]

paging Mutant.

Why? So he can make a post and mention the idea of a gold standard and then someone else can go hurf durf Google Ron Paul?

A few of you may have heard of Technocracy.
Now - I just went to my bookmarked link to the 1955 paper. Seems that web site is gone. I did find a copy of the paper along with a critique over at mises.org but to avoid the non-sense hurf durf replies I'll send you to
Energy Accounting Information Brief Number 29 1955
To track such - Emergy and a software tool Emergy simulator
posted by rough ashlar at 11:34 PM on September 6, 2010

But the US has very little chance of defaulting

The phrase "not worth a Continental" rings in my ears for some reason.
posted by rough ashlar at 11:39 PM on September 6, 2010

Basically, Sovereign Debt is a GOOD THING.

Not if it's used for unproductive purposes. Debt for investment can be an incredible engine of economic growth; debt for consumptive reasons is terribly damaging. You not only destroy the wealth by consuming it, you also incur further economic damage to pay the interest. Money that's going to interest is money you can't use to build roads or factories or clean up the environment.

Sovereign debt is the worst of all, because a default becomes a calamity. You don't typically see those until the economy and government have become completely dependent on debt issuance, so the 'sudden stop' of a debt default can completely destroy an economy.

Normal debt is priced with the idea that default can happen; the lender understands that if the borrower dies or goes bankrupt, he or she doesn't get his or her money back. One of our strongest principles is that you are not responsible for debts incurred by your parents. But when it's issued through the government, you ARE.

Like it or not, our children will have significantly impaired quality of life, because they will have to service the debts we're taking on for completely stupid reasons that will be of little or no benefit to them. We're living beyond our means at their expense.

Sovereign debt is deeply dangerous, and should be used only in very limited circumstances.... existential-level threats and self-liquidating bonds (ie, bonds for toll roads) are two examples that come to mind. You can't get out of it without terrible consequences, so issuing it should be considered with extreme care.
posted by Malor at 12:04 AM on September 7, 2010 [1 favorite]

Why? So he can make a post and mention the idea of a gold standard and then someone else can go hurf durf Google Ron Paul?

Mutant ≠ Malor
posted by maxwelton at 12:09 AM on September 7, 2010 [3 favorites]

issuing it should be considered with extreme care.

The care has been "I need to stay in office", isn't that good enough?

Sure sounds more important than a toll road.
posted by rough ashlar at 12:09 AM on September 7, 2010

Mutant ≠ Malor

Mea Culpa. (didn't someone else last week confuse Malor with Mutant?)
posted by rough ashlar at 12:10 AM on September 7, 2010 [1 favorite]

Sovereign governments that issue debt in their own currency are not fiscally limited. They can continue to pay the bonds. In fact , they don't even have to issue bonds to "raise money." You can think of the USA as Blizzard. Blizzard does not have to issue "WoW Gold Bonds" before it issues WoW gold in game. Nope. It just credits player accounts. What prevents inflation? Blizzard has various ways of draining WoW gold out of player hands-- a wealth cap, various NPC draws, etc.

What gives the WoW gold it's value? One, the fact that it has to be used in game to pay various NPCs to continue playing, and two the value created by WoW play.

This basic understanding of currency is known as Modern Monetary Theory. Two of the major players are Randall Wray (in the US, at UMKC) and Bill Mitchell (Australia).
posted by wuwei at 12:18 AM on September 7, 2010

Mutant ≠ Malor

Mea Culpa. (didn't someone else last week confuse Malor with Mutant?)

Yeah, Mutant is a London-dwelling dude who does this for a living.

That said, I don't worry too much about this week's 'the financial sky is falling.'

Jobs are the problem du jour. We need more employment.
posted by Ironmouth at 12:25 AM on September 7, 2010

Like it or not, our children will have significantly impaired quality of life, because they will have to service the debts we're taking on

They could always say 'nope, not gonna do it'. Its been done before. Sometimes done in Biblical proportions.
posted by rough ashlar at 12:26 AM on September 7, 2010

Many of the potential problems and risks are surprising, even to those well-versed in their particular area of finance. What happens if Things Go Really Bad? ...out of the multitude of potential scenarios, I have settled upon one which is really bad, but doesn’t involve asteroids, mass extinctions, or apes taking over. It is consistent with prior bad episodes of sovereign debt default.

You do realize your first link says this:
"CR Note: This series is from reader "some investor guy"

I'm not gonna get my undies in a twist just yet.
posted by Ironmouth at 12:30 AM on September 7, 2010

Like it or not, our children will have significantly impaired quality of life, because they will have to service the debts we're taking on


Or we could just raise taxes and balance the budget.
posted by Ironmouth at 12:32 AM on September 7, 2010

Why would we want to balance the budget and pull even more money out of the economy?
posted by wuwei at 12:55 AM on September 7, 2010 [1 favorite]

Sovereign governments that issue debt in their own currency are not fiscally limited. They can continue to pay the bonds.

Yes, they can do this by printing money. In essence, this is the process of stealing wealth from existing savers, by issuing new claims on wealth without the corresponding actual wealth to back it. Over time, this leads to inflation, and then hyperinflation if it continues for too long.

It worked out ever so well for Mugabe, after all. If you'll notice, the instant they stopped trying to fund overconsumption by printing money, their economy started to recover. Store shelves are stocked again, there are some jobs, people are surviving. All the other problems of Zimbabwe are still there, but they at least fixed that one, and now they have at least a chance to recover.

Wealth isn't easy. You can't just wave it into existence, you have to work for it.
posted by Malor at 12:59 AM on September 7, 2010

Wealth isn't easy. You can't just wave it into existence, you have to work for it.

Dude, don't just slather on platitudes without even thinking. "Working for it" is not the most common path to wealth, at least not in the US. And as for Mugabe, yeah, things do seem to be working out for the President of Zimbabwe, unfortunately.
posted by ryanrs at 2:17 AM on September 7, 2010

"Working for it" is not the most common path to wealth,

Wealth may not mean a large pile of FRNs. Wealth may be the conversion of some raw materials into goods. Mining, chopping down forests, walking behind a mule - those are work.

Most of the large piles of FRN's had someone at some time who had raw materials they were somehow in control of. Now getting that control via fraud, a poker hand, at the barrel of a gun, the land patent from a leader, a well written for them contract are forms of "work". Note that there exists a common disconnect from the conversion of raw material into finished goods and the people who end up with the large piles of FRN's. One day when you have a large pile of FRN's you'll understand that doing the actual conversion of material into finished goods is a mugs game. You just want a slice of the conversion.

Getting up every day to climb to the top of Killmotor Hill and then climbing the stairs of the Money Bin is HARD work. Your reward is a nice swim, so that makes it all good.
posted by rough ashlar at 3:23 AM on September 7, 2010

It's really quite simple. Sooner or later, humankind is will either have to come to terms with the fact that economics and finance is all a people-made illusion

That's the opposite of a fact. Economics is the allocation of limited resources i.e. the harsh reality as long as we are not in utopic-SF territory.
posted by ersatz at 3:53 AM on September 7, 2010 [1 favorite]

That's the opposite of a fact. Economics is the allocation of limited resources

If I take a gun and allocate your limited resources to myself - is that Austrian, Kensian, Capitalism, Capitol-ism, or this new Obamanamics I hear about on the twitter from the Palin?
posted by rough ashlar at 3:56 AM on September 7, 2010

Yes, they can do this by printing money. In essence, this is the process of stealing wealth from existing savers, by issuing new claims on wealth without the corresponding actual wealth to back it.

Printing money is in my interest, at least for the next two decades. I owe lots of money (mortgage) and have small savings but a high income. Transferring wealth from rich baby-boomers to me by means of inflation would suit me fine. Another alternative, increasing my taxes to pay for government debt, would not. Both are actions that the government can take.

Is running the economy at a higher rate of inflation "stealing"? Is raising taxes "stealing"? There are winners and losers with any policy, and using words like "stealing" makes the argument emotional.

I'd generally agree that not printing money and keeping inflation down is a good policy, but we're going to have to do something about debt levels, either through lower government spending, higher taxes or increased economic growth. Well, that's easily done! Grin. So tolerating a higher level of inflation may be a way for savers to do their bit to help.
posted by alasdair at 4:13 AM on September 7, 2010 [2 favorites]

The anger and contempt I feel for Irish government actions throughout this crisis is bested only by my disappointment at the muted manner in which our population reacted. It is a terrible day when our Minister for Finance can openly boast about his ability to rescue financial institutions at the expense of workers; I can only hope that at some stage people here will start to take notice and actually do something about it. The equivalent of our entire 2010 tax take has been squandered rescuing just one failed bank. There has never been a clearer opportunity to realign Irish politics with a clear left-wing alternative, to break free of our still civil war centred oppositional system, but instead the population has fallen hook line and sinker for a right-wing narrative and are baying for their own blood like the sad flagellants that they are.

/sorry, rant over
posted by nfg at 5:16 AM on September 7, 2010 [4 favorites]

Why would we want to balance the budget and pull even more money out of the economy?
posted by wuwei at 12:55 AM on September 7 [+] [!]


Debt has a cost. It requires interest payments. Interest payments increase proportionally to the amount owed; as debts reach ever higher levels, the federal budget will be increasingly devoted to servicing the debt. At some point before this expense consumes the entire budget, leaving no money available for anything else, the system breaks down. That is why we would want to balance the budget - unless, of course, we would rather just default on the debt, which is very damaging to all the financial institutions and lenders who loaned the money that they are now not going to be repaid. So really, it doesn't work out well, either way. That is why it is better to balance the budget in order to avoid having a continual increase in debts. Better still would be to repay the debts and to stop financing governments with borrowed money.

The public loves to spend money that it doesn't have. Why should we have to pay for things when we can just bequeath the cost to future generations? But this strategy only goes so far. We are reaching the end of that particular road.
posted by grizzled at 5:29 AM on September 7, 2010 [2 favorites]

What gives the WoW gold it's value? One, the fact that it has to be used in game to pay various NPCs to continue playing, and two the value created by WoW play.

I don't mean to derail this interesting thread, but I found this analogy useful and intriguing (I'm not a gamer but find the whole phenomenon fascinating despite being an outsider). Anyone know of any sustained analysis of "fictive" economies a la WOW?
posted by foxy_hedgehog at 5:33 AM on September 7, 2010

Basically, Sovereign Debt is a GOOD THING.

Not if it's used for unproductive purposes.

Malor, would it kill you to read the entire comment before you reply to it? So you know when you're appending your standard economic statements to a joke?
posted by ROU_Xenophobe at 5:46 AM on September 7, 2010 [7 favorites]

The Default Risk chart doesn't represent the actual default risk, but the default risk perceived by the markets, measured, I guess, by the premium those countries have to pay on their sovereign debt.
The thing is, not only aren't markets always right, they're actually always wrong: otherwise there wouldn't be opportunities for arbitrage, price fluctuations or even profit margins in the financial sector. In this particular case, I consider they are egregiously wrong. I'm perhaps biased, being Spanish, but I believe the chances of a Spanish sovereign default to be practically nil. You may dismiss my judgment, but I consider myself to be better informed about Spanish society and politics than the average trade room jockey in London or New York, and I can't for the love of God understand how Spain can be a higher sovereign debt risk than other countries with considerably higher public debt and deficit (and yes, I'm looking at you, UK). I don't believe in the conspiracy theories about "Anglo-Saxon speculators", but I'm certain that an industry so endogamous, and dominated by a few sites (London, NYC, Frankfurt and Tokyo, basically), and where most people rely on The Economist, Business Week, WSJ and FT for their information, will always show a huge cultural bias.
posted by Skeptic at 5:50 AM on September 7, 2010 [2 favorites]

Inflation is not relevant to this discussion. None of the countries at significant risk of default borrow very much at all in their own currencies.

The US debt it big, we've all be warned about that in TV campaign ads since we were kids. It's much much smaller, as a portion of the US economy, than the countries discussed in the article. Of course that might change in the future, but the article is only looking 5-10 years out.

The article doesn't discuss the triggers that could lead to mass defaults. I suppose that's OK sincemass defaults have happened in the past, and no one understands them. But it seems a little like panicking because I might get hit by a bus tomorrow. Sure,, it could happen...but it also could not happen, and there's nothing I could do about it either way.
posted by miyabo at 5:50 AM on September 7, 2010 [1 favorite]

Printing money is in my interest, at least for the next two decades. I owe lots of money (mortgage)

Actually what is in your interest is to check if your mortgage has fraud by the banker and if so you then play 'wack the banker' with TILA and RESPA.
posted by rough ashlar at 6:07 AM on September 7, 2010

Printing money is in my interest, at least for the next two decades. I owe lots of money (mortgage)

So, you want someone else to pay for your house in the next couple decades, and you want future generations to pay interest on those payments?
posted by 445supermag at 6:43 AM on September 7, 2010

Malor wrote: "Like it or not, our children will have significantly impaired quality of life, because they will have to service the debts we're taking on for completely stupid reasons that will be of little or no benefit to them. We're living beyond our means at their expense. "

In an environment of declining GDP, your statement makes perfect sense. Otherwise, it sounds like gibberish to me.
posted by wierdo at 6:45 AM on September 7, 2010

You guys are all hip and tech-savvy and liberal and stuff, but the inconvenient truth is that you wouldn't know shit about economics if Adam Smith rose from the grave, broke into your house while you were sleeping, squatted on your face and shat The Wealth of Nations into your earhole.

I am neither hip nor tech-savvy, but I will admit that this describes my knowledge of economics perfectly. It's why I read shit like this so that maybe someone can explain it to me. So far, it's not working out so well, but I blame that on my earhole being full of all the other things that people have shat into it that I still don't fully comprehend.
posted by sonika at 7:18 AM on September 7, 2010 [4 favorites]

A houseguest this weekend pointed out that many people (including me for example) have become so used to inflationary pressures being the norm that almost nobody (in the general sense) has noticed the current economic problems are on-the-brink of deflationary rather than inflationary now as a fact.

I pay more detailed attention to the weather than I do to the economy. Probably for the reason that I feel like I can have more influence over the weather.

One thing that I have noticed in my industry is that sagging sales are causing manufacturers to move into higher-priced gas heating stoves. Gas sales are down except at the top end. The most expensive products are still selling because the wealthy are still buying. It makes me sad to think what a real trickle-down economy would look like.

Moldavia, probably. Piles of potatoes in the market but nobody has any money to buy them. Meanwhile the mobsters drive past in their Mercedes.
posted by warbaby at 7:29 AM on September 7, 2010 [8 favorites]

almost nobody (in the general sense) has noticed the current economic problems are on-the-brink of deflationary rather than inflationary now as a fact.

Come to England and show me this deflation. My bags of crisps are now more expensive and about 25% lighter. There is significant consumer cost inflation in everyday consumables here. The only thing deflating over here is my waistline.
posted by srboisvert at 7:36 AM on September 7, 2010 [1 favorite]

Standard's and Poor's Credit Ratings:

You mean the guys that downgraded my province's credit rating for electing someone businessmen didn't like? The guys that knowingly gave top ratings to toxic mortgage backed securities? Fuck those guys.
posted by mobunited at 7:42 AM on September 7, 2010 [5 favorites]

If I take a gun and allocate your limited resources to myself - is that Austrian, Kensian, Capitalism, Capitol-ism

I'd vote for "Hobbesianism," although it doesn't quite roll off the tongue.

The Default Risk chart doesn't represent the actual default risk, but the default risk perceived by the markets...

Well, yeah. Short of a crystal ball, that's about the only thing you can do. E.g., nobody outside the Greek government, or perhaps some very rarefied circles who work with people in the government, know for sure whether Greece is going to make its debt obligations. (And even then, they might not know either.) But it's relatively easy to discover what the market as a whole thinks of the odds of a Greek default, and in some ways that's the more important metric anyway, since that's what the rest of the market is making decisions based on.

However...

But it seems a little like panicking because I might get hit by a bus tomorrow. Sure,, it could happen...but it also could not happen, and there's nothing I could do about it either way.

There was a fascinating article I read a few days ago, written by Peter Thiel (one of the co-founders of PayPal, along with the more well-known Elon Musk), which discusses — among other things — exactly this sort of view. It's called 'The Optimistic Thought Experiment' and I'd been thinking about trying to put together an FPP on it, but I'm not sure how it would go. (He gets a little combative at times and I can see the discussion going downhill in response to the obvious grar-bait.)

Anyway, one of his points is that there are a lot of scenarios where things go really badly and everything blows up. World war, ecological catastrophe, some sort of chain-reaction financial crisis that brings down the whole system, etc. But these risks aren't really priced into the market, in the way that lesser risks are, because there's no way to hedge against them. If they occur, the whole global capitalist system is pretty much screwed, so it makes more sense just to ignore them. Just like an individual might find it difficult to really plan for a scenario where they get run over by a bus, the capitalist system as a whole has difficulty planning for any scenario that involves the death of global capitalism. (Sort of a forward-looking anthropic principle.)

He goes from there to make a number of interesting and perhaps controversial points, but one of the things I took from the piece was that it's probably not safe to use market indicators to try and predict or quantify the risk of events that might destroy the market, and that the market probably tends to underestimate those risks that it can't effectively offer a hedge against.
posted by Kadin2048 at 7:48 AM on September 7, 2010 [6 favorites]

nfg did you happen to watch any of RTE's Freefall last night, and catch Lenihan's statement about being at a racecourse in Kilkenny when the French finance minister (i think) was trying to reach him in the middle of this financial emergency. And of course he doesn't have a mobile phone!
Around 24/25 mins in is where he smirkingly says why he was uncontactable.

Feel any more anger & contempt yet?
posted by Fence at 10:07 AM on September 7, 2010 [1 favorite]

Fence: Luckily for my blood pressure I didn't, I just watched it now. You're absolutely right, that smirk says more than words ever could.
posted by nfg at 10:21 AM on September 7, 2010

Come to England and show me this deflation. My bags of crisps are now more expensive and about 25% lighter.

Ah, but you're not looking at "Core Inflation", which excludes food and energy. This is a more stable metric of inflation, because it allows economists to ignore all the volatile and confusing changes in prices of the things that are really only major expenses for poor people anyway.
posted by roystgnr at 10:34 AM on September 7, 2010 [1 favorite]

roystgnr wrote: "Ah, but you're not looking at "Core Inflation", which excludes food and energy. This is a more stable metric of inflation, because it allows economists to ignore all the volatile and confusing changes in prices of the things that are really only major expenses for poor people anyway."

They're excluded because their volatility is unrelated to broader inflation and deflation and merely serves to mask the real signal. Or it's a conspiracy to screw poor people, whichever you like is fine.
posted by wierdo at 10:40 AM on September 7, 2010

If I take a gun and allocate your limited resources to myself...

Then you are John Galt!
posted by Devils Rancher at 10:46 AM on September 7, 2010 [1 favorite]

To anyone who says that there is no inflation, UK retail electricity prices have increased 22% in the last 12 months despite demand being reduced .03%. Demand is nearly perfectly inelastic.
posted by nickrussell at 10:54 AM on September 7, 2010 [2 favorites]

World war, ecological catastrophe, some sort of chain-reaction financial crisis that brings down the whole system, etc. But these risks aren't really priced into the market, in the way that lesser risks are, because there's no way to hedge against them. If they occur, the whole global capitalist system is pretty much screwed, so it makes more sense just to ignore them. Just like an individual might find it difficult to really plan for a scenario where they get run over by a bus, the capitalist system as a whole has difficulty planning for any scenario that involves the death of global capitalism.

There are lots of things that an individual can do to plan for the getting-run-over-by-a-bus scenario. For a couple examples, my work is in version control to make it easier for my project to go on without me, and some of my income goes toward life insurance to make it easier for my family to get along without me... there's nothing that can be done to make a disaster into a non-disaster, of course, but there are things that can be done to reduce how bad a disaster's effects might be.

This is true for capitalism as well, but with the added bonus that many of the things which reduce the extent of disaster for an individual also reduce the likelihood of disaster for the whole. People who don't buy into a bubbled commodity or who sell one before the pop avoid losing wealth when the bubble pops, certainly, but the effects of reduced demand at the peak of the bubble and increased demand after the pop are to slightly reduce how bad the bubble is for everyone. Collectivist or capitalist, lots of people will make bad decisions lots of the time, but in the purely capitalist world it's easier to find dissenters rewarded for agreeing with reality rather than punished for disagreeing with the majority.

Of course, this is a simplification; even the worst collectivist societies had limits on how much they could or would micromanage individual economic decisions, and even nominally capitalist societies are willing to make huge collective efforts to resist equilibrium whenever it looks like "oh noes housing prices are going down!" This sort of resistance is at the root of why "planning for any scenario that involves the death of global capitalism" won't happen. In scenarios which merely involve the impoverishment of global capitalism, hedging against risk greatly reduces impoverishment for yourself and slightly reduces it for others. But what's the point of hedging against "to each according to his need"? If you get to keep your profits but you're going to be bailed out of your losses, you might as well gamble as big as you can, even knowing that everyone else doing the same will help crash the system in the first place.
posted by roystgnr at 11:04 AM on September 7, 2010

Then you are John Galt!

But I don't wanna be him. Because then I'd have to read Ayn Rand and I've managed to avoid doing that.
posted by rough ashlar at 11:50 AM on September 7, 2010

I don't mean to derail this interesting thread, but I found this analogy useful and intriguing (I'm not a gamer but find the whole phenomenon fascinating despite being an outsider). Anyone know of any sustained analysis of "fictive" economies a la WOW?
posted by foxy_hedgehog

This might fit the bill: Synthetic Worlds: The Business And Culture of Online Games
posted by Fuzzy Monster at 1:59 PM on September 7, 2010 [1 favorite]

You do realize your first link says this:
"CR Note: This series is from reader "some investor guy"

Heh, and who didn't do a little "waitaminutehere" when they read the name of the author? Funny how that works. Anyhow for what it's worth, he doesn't seem to be blowing smoke. There are no egregious misstatements of concept or fact as far as I could detect although I'm judging from only having taken two or three graduate level courses in finance (rather than spending my whole work day immersed in the field). As well, the main dude at Calculated Risk has vetted the piece and that for me, is the clinching factor as far as credibility goes.
posted by storybored at 2:38 PM on September 7, 2010

If I take a gun and allocate your limited resources to myself - is that Austrian, Kensian, Capitalism, Capitol-ism, or this new Obamanamics I hear about on the twitter from the Palin?

I would so hope in such a case that this economic act was an illusion.
posted by ersatz at 4:22 PM on September 7, 2010

If I take a gun and allocate your limited resources to myself -

This is a pre-capitalist stage called primitive accumulation of capital.
posted by pompomtom at 10:16 PM on September 7, 2010

If I take a gun and allocate your limited resources to myself -
This is a pre-capitalist stage called primitive accumulation of capital.

Ok. Now time to square the circle.
Carter Doctrine (about oil)
Iraq conflict I (slant drilling of oil)

and a possible future
Iran's fission reactor providing civilian power so they use less oil internally and can therefore export more oil. (reactor gets attacked)
posted by rough ashlar at 5:18 AM on September 8, 2010

So, you want someone else to pay for your house in the next couple decades, and you want future generations to pay interest on those payments?

"Want" is the wrong word. But higher inflation is good for me at my time in life. Lower inflation is good for rich old people with private pensions. We have competing interests. (Very rich people have index-linked pensions, so they don't care!)
posted by alasdair at 3:08 AM on September 9, 2010

Sorry it took me so long to get back to this thread. Work was....work.

grizzled: Wrong. That only applies when a government is not the same as the currency issuer. As I explained above, currency issuers do not have to issue debt to fund spending. Every dollar that the US government accepts in exchange for a treasury security, must first have originated with the Federal Reserve. Think about this from an accounting point of view. There is a balance sheet with the total number of dollars in existence. Only the currency issuer can add to the balance sheet. I'm sure you can say , well what about the money multiplier, wuwei? What about banks creating money when they make loans? Again, back to the accounting. For each dollar created in a loan and given to someone, there is an equivalent debt created. There is thus _no net private creation of money on the balance sheet_. Only the Federal Reserve can add to the net balance.

We don't default on the debt. We simply pay the current bondholders and then ... stop issuing debt. Since the US government can issue its own currency, then there is no risk of default. We do what we always do, which is credit the accounts at the Fed. Inflation is the only issue, i.e. real resource constraints. Look, the CPI, last I checked, was pretty much flat.Again, per my original post, I direct you to the work of Randall Wray and Bill Mitchell on this issue of Modern Monetary Theory.

Malor:
No, the United States is not Zimbabwe. For more on that you can see myth 7, from the article "Nine Deficit Myths." Briefly, from the article

There, the conditions for hyperinflation were caused by the destruction of nearly half of the country’s domestic food production via misguided land reforms, plus a civil war which eliminated much of the economy’s productive manufacturing capacity. In response to food shortages, the Bank of Zimbabwe used valuable foreign exchange reserves to buy imported food, leading to a lack of foreign currency to purchase essential raw materials...

I actually think I understand where you're coming from with your concern over the debt and what it will do to future generations. I used to have exactly the same views that you do regarding the debt and the budget deficit. In fact, that concern led me to really look into the material and try to understand what is happening. And after reading through the work coming out of UMKC and Bill Mitchell in Australia, I am convinced that I was wrong.

You're right, we have to work for wealth. And in the present situation with escalating unemployment and idle factories, we're actually destroying wealth. There are opportunities for people to work and be productive, but we're bypassing those, and we're not going to get them back. Proper fiscal policy on the part of the currency issuer is part of keeping people on the job, and ensuring that there is enough money in the economy to facilitate the exchange of goods. And that's not happening right now.

I know I might sound like I am beating this Modern Monetary Theory thing to death in my posts lately, but it's really important. Most of the debates we have here on the blue about social spending and the role of government come down to "well we can't afford XYZ in this time of rising deficits." MMT shows how that discussion is actually wrong-- we have the resources to do things but we are choosing not to do it. Today, in the San Francisco Bay Area where I live, at least 4 people have died and dozens of homes have been destroyed in a gas line explosion. It looks like one of my friends might have lost everything, but at least she's still alive. On the radios this morning I heard that the gas line is at least 48 years old, and that some experts suspect the age of the equipment, and the short-handedness of the gas company crews might have lead to the disaster. A couple of years ago it was a bridge in Minnesota that collapsed because it was old and poorly maintained, and only sheer luck prevented an entire school bus full of kids from falling into the river.

Frankly, I am tired of seeing things like this happen. The United States, for a brief shining moment under FDR, actually allocated resources in a way that ensured that every American who wanted one (and then some...) had a job. Its was also the only time that the African American employment rate roughly matched the the percentage of African American adults in the American labor force. In the Bay Area, the heavily African American neighborhoods were not always marked by gang activity and crushing poverty. Rather, they were blue collar neighborhoods where people had jobs and self respect. It was only after the jobs left that the crack trade took hold. I'm sorry I can't pull the exact stats on jobs right now, I'm a little busy.

The full employment under FDR built the foundation for fifty years of prosperity and yes, wealth, in the United States. It wasn't just the WPA, but it was really the war effort that gave everyone a job. Somehow it was A-OK to have full employment as long as it was for building killing machines, but somehow it was evil and wrong to pay people to build schools, streetcars and stadiums, and wrong to pay for college educations. I guess some people would call it "socialism." Call it whatever you want, but from where I sit in 2010, it looks a hell of a lot better than the so-called austerity that the financial services industry and its lackeys are pushing. They get bonuses and we get exploding gas lines, collapsing bridges and spiraling student debt. Got it.
posted by wuwei at 11:16 AM on September 10, 2010 [3 favorites]